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July 2, 2012

Retirees Need Health Care Cost Reality Check

Retired clients may be overconfident about their ability to pay for health care in retirement

While the Supreme Court decided to uphold the Affordable Care Act, a study from Nationwide Financial found that the difficulty of judging how much to save for health care in retirement continues even after Americans stop working.

Fully 90% of retired respondents said they are confident they can cover future health costs, compared with half of pre-retired baby boomers with the same amount of assets who said they were “terrified” of what health care costs could do to their retirement plans.

In January, Harris Interactive surveyed 625 retired people 65 and older and 625 people 55 and older who planned to retire by 2020. Nationwide released a portion of the survey on May 7, and followed up on June 25 with the most recent release.

The Act “doesn’t change anything,” John Carter (left), president of distribution and sales for Nationwide Financial, told AdvisorOne on Monday. “Individuals still need to work with their advisors to adequately prepare.”

For the 60 million boomers who will begin retiring over the next 16 years, Carter said, that means planning for a retirement that isn’t supported by generous pensions. “We don’t believe corporate benefits will be richer. We don’t believe Medicare will be richer.”

Just 21% of retirees say health care is their biggest cost, compared with 40% who cite housing as their biggest expense, the most common response. On average, retirees estimate they spend $4,083 per year on premiums, copayments and deductibles. However, 21% say they spend less than $1,499 every year, and 22% don’t know how much they spend.

“Part of the survey asked Americans how much they would spend on health care in retirement. Retirees and pre-retirees all underestimated the cost by close to 50%,” Carter said. Not only that, but both groups guessed at the number rather than undertaking any calculations. “Individuals need to have dialogues with their advisors around the role Medicare plays in their retirement.”

A 65-year-old couple retiring this year could need as much as $240,000 for health care in retirement, excluding nursing-home care, according to Fidelity.

So why are retirees so confident in spite of these obstacles? One theory for retirees’ confidence, according to Nationwide, is that they are already paying for health care without struggling. Furthermore, many retirees have pensions and employer-paid health care, while many boomers don’t.

Retirees who think they can get around the health care problem by staying healthy may end up paying for it anyway in longer lifespans and needing care for more years, Kevin McGarry, director of the Nationwide Institute, said in a statement.

Retirees also fail to take into consideration how much inflation will reduce their savings, or that they may need long-term care for some time.

“Too many people underestimate the amount of money needed to cover their health care costs in retirement because they do not think they will ever need long-term care,” McGarry said. “In 2008, the annual cost of a nursing home was about $71,000 for a semi-private room, but nursing home costs are expected to reach $265,000 per year by 2030.”

Medicare is still a source of confusion for some retirees. Nearly 40% said they wish they understood the program better. Advisors can help their retired clients by reaching out to them. Only one in six retirees said they plan to meet with their advisor about costs beyond what Medicare cover, even though 70% of clients who have talked to their advisor said it helped.